America’s unipolar moment passed as quickly as it appeared at the end of the cold war

Philip Stephens

The hardest thing for a hegemonic power is to see its dominance wane. US president Donald Trump’s angry unilateralism, whether his trade war against China or sanctions against Cuba, is supposed to be proof of power. Another way of looking at the president’s belligerent tweetstorms is as a cry of pain for a mythologised past.When Franklin Roosevelt prepared to meet Winston Churchill during the closing stages of the second world war, the US president received some cautionary advice from his secretary of state on handling the British prime minister. Churchill, Edward Stettinius told Roosevelt, would struggle to accept a new, postwar, international order. Having been a leader for so long, the Brits were not accustomed to a secondary role.Stettinius was right. Britain had been bankrupted by the war. America was booming. The peace marked the formal transfer of western leadership to the US. Washington’s ally found the psychological adjustment long and painful. Even after the humiliation of the Suez expedition in 1956, Britain was loath to own up. Surely, its politicians imagined, it still sat alongside the US and the Soviet Union as one of the “Big Three”? Bizarre as it seems, there remains an echo of this howl of anguish in the “global Britain” fantasies of leading Brexiters.Now it is America’s turn. The truculence of Mr Trump’s foreign policy is meant to convey that the US can do as it pleases. Lesser nations may feel the need to submit to a panoply of international rules. But the US can stand alone, free of the multilateral entanglements and costly alliances it established after the end of the second world war. Parallels with Britain are necessarily far from exact. The US remains the pre-eminent global power — economically, technologically and militarily. The dollar’s place as the world’s reserve currency provides a unique capacity to apply economic coercion. Russia is a falling power. China’s plan to dominate Eurasia is a decades-long project. For all that, America’s unipolar moment has passed as quickly as it appeared at the end of the cold war. US power has been checked and, in relative terms, is in steady decline. Not so long ago, the hyperpuissance, as the French called it, imagined a future of effortless ascendancy. In China, the US now faces a rival with its own sense of manifest destiny. As America’s position erodes, fewer nations swear unquestioning fealty. Vladimir Putin’s Russia, though facing absolute decline, is openly defiant. Washington has yet to make the psychological shift. Mr Trump’s response is not without a crude logic. The postwar decades saw an extraordinary alignment of the American national interest with a rules-based international system. In designing and building the institutions of a liberal global order, the US promoted its own prosperity and security. The adage that what was good for the country was good for General Motors and vice versa was essentially true. When the US underwrote the peace in Europe, East Asia and the Middle East, it did so to its own advantage.This is the age Mr Trump harks back to. The clue is the “again” in “Make America Great Again”. The president is trapped in a world where economic might was indeed measured by auto sales, trade was essentially about tariffs, and the response to a recalcitrant government in Tehran was for the CIA to organise a coup. The mindset is well described in Anglo Nostalgia, a recently-published book by two European scholars, Edoardo Campanella and Marta Dassù. Start with an idealised view of the past, stir in the paranoia beloved of populists everywhere and, hey presto, you have the nostalgic nationalism that is Mr Trump’s foreign policy. Barack Obama’s misfortune was that he grasped fairly early on the significance for US interests of these global power shifts. Mr Trump’s predecessor drew the right conclusions. If the US could no longer act unilaterally, its interests were best served by leveraging its alliances. If global rules needed changing, the US would deploy its convening authority to shape the new order. For his pains, Mr Obama was lambasted as hesitant and weak.Mr Trump’s answer is that if the system no longer works for the US then he should break it up. It all sounds tough, especially alongside the theatrical attempts at dealmaking. The problem is that it does not work. The US has been the loser from throwing overboard multilateral trade agreements such as the Trans-Pacific Partnership. Mexico has yet to stump up a single dollar to pay for a wall on its border with the US. North Korea’s Kim Jong Un has secured de facto recognition of his country’s nuclear status. Iran may be feeling the pain of US sanctions but the odds are the hardliners in Tehran will be the main beneficiaries. Mr Putin operates with impunity in Syria and, more recently, Venezuela. Mr Trump’s withdrawal from the Paris climate change accord has handed the moral high ground to Chinese president Xi Jinping. The list goes on.Among allies, whether Japan, the Republic of Korea or European partners in Nato, the US has lost trust. The common denominator in the policies of all these nations is a hope they can simply “wait out” Mr Trump’s presidency. This is probably a mistake. Mr Trump is not alone among Americans in his disillusionment with the old order. But the louder the president shouts the less inclined the rest of the world is to listen.

The Fed Stops Pretending

By: Peter Schiff

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Well, it didn’t take much and it didn’t take long. After years of delays, a tentative start, many cautious pauses along the way, and a top speed that never really hit cruising velocity, the Fed has taken the first available off-ramp on the road towards policy “normalization.” In a speech on Tuesday this week in Chicago, Fed Chairman Jerome Powell delighted Wall Street by signaling that the Fed may soon deliver the gift that investors had been hoping for…the first interest rate cut in almost a decade.While many savvy economists should have seen this coming, as late as October of last year, almost no one in the financial world thought that the Fed would so easily abandon its long-held bias without a gale force recession blowing them off course. But, in reality, all it took was a light breeze to force a 180-degree turnaround.Throughout much of 2017 and 2018, the Fed had presented a tough posture. They argued that the economy had finally improved enough to remove the “unconventional” policies that it had implemented following the Great Recession of 2008. These moves, which included zero percent interest rates and the direct purchases of trillions of dollars of mortgage and Treasury bonds, had never been tried before 2008. But since the financial crisis was unprecedented, and the ensuing recession so severe, the Fed was prepared to do anything to prevent a replay of the Great Depression. And while the Fed started tightening policy as far back as 2014 (when it began slowing its bond purchases), by just about anybody’s measure, policy remained stimulative. The Fed admitted throughout its tightening cycle that it still had a long way to go to get to “neutral,” but it was apparently determined to get there.By early 2018, with GDP growth approaching 3%, the stock market rocketing to all-time highs, and the unemployment rate dipping to the lowest in generations, it appeared as if the Fed’s plan was on track. The Fed cited these benign conditions as reasons to continue down the road towards neutral and to throw away the monetary crutches that had supported the economy since 2008. To that end, the Fed clearly indicated that it planned to raise interest rates continuously throughout 2018 and 2019 (bringing rates to approximately 3.5% by 2020) and to chip away at the Fed’s $4.5 trillion balance sheet through “automatic” $50 billion per month bond sales. It indicated that this “quantitative tightening” would last for years.For investors, the Fed’s confidence was infectious. Many seemed to agree with President Trump that the U.S. economy was the strongest it had been in decades, and maybe, as Trump suggested, the strongest in our history.I had argued at the time that we were simply living in the final stages of a “sugar high” that came from lingering deregulatory optimism stemming from Trump’s surprise 2016 election victory, and the short-term stimulus of tax cuts and record deficit spending. But, as usual, such concerns were not taken seriously.But then in November and December markets dipped 20%, and briefly brought us into the first “bear market” in almost a decade. All bets were off. As heavyweight champion Mike Tyson was famed for saying, “Everybody has a plan until they get punched in the mouth.”I argued that the selloff was inevitable given that our economy was built on a foundation of artificially low interest rates, and that even rates as low as two percent were too heavy a weight for the economy to bear. But mainstream analysts were largely uninterested in the real reason the market was falling, they just wanted the selling to stop. After all, markets were only supposed to go up…as they had done continuously for almost a decade. And so, the voices grew louder that the Fed should abandon its efforts to normalize. Loudest among these voices came from Trump himself, who called Fed policy “crazy.” The pressure soon proved effective.In remarks in late December, Chairman Powell revealed a change in strategy. He indicated that the Fed would be “patient” in its approach to further tightening. While he did not abandon his intention to continue on the path to normalization, he promised to be more sensitive to market conditions along the way. This “Powell Pause” sparked a relief rally, giving a dying bull market a new lease on life.Nerves were further soothed when the Fed announced that its bond-selling program would be taken off “automatic pilot.” Shortly thereafter, it quietly announced that the program would be fully ended in September, years earlier than expected, which would leave its balance sheet far larger than what had been promised. But the Fed still maintained the pretense that further tightening would happen, just after a longer, and unspecified period of time.While these concessions put the wind back in Wall Street’s sails, nothing substantive had changed in the economy. The sugar high that most analysts confused for legitimate economic growth was merely wearing off, threatening to expose an economy more imbalanced, debt-laden, and vulnerable to a possible collapse than it was in 2008.By May of this year, it became impossible to ignore the underlying weakness in the economy. Though the signs were plainly visible for most of 2018, particularly in housing, autos, and retail sales, it was not until the yield curve finally inverted in early spring that investors took notice. Typically, yields on long-dated Treasuries only fall below the yields of shorter-dated Treasuries when the economy is moving toward recession. While many analysts offered theories as to why this usually reliable recession predictor was no longer valid, the fear began to spread.Then in recent weeks, the economic data turned much softer. Deterioration accelerated in the housing market (where the lowest mortgage rates in years have failed to translate into home sales or mortgage origination), in factory orders, industrial output and consumer spending. New data from the auto market revealed that the time needed to sell new cars has not been longer since the recession year of 2010. Auto, credit card, and student loan delinquencies also rose to levels not seen since the Great Recession, according to data from the NY Federal Reserve Bank. The anxiety was ramped up this week when ADP released its worst employment report in almost a decade, showing only 27,000 private sector jobs created in the month of May. Ominously, the biggest losses were in high paying goods-producing jobs. That was followed up by the Labor Department’s release of a much weaker than expected 75,000 gain in non-farm payrolls in May, together with significant downward revisions to prior months’ numbers.But the biggest shadow hanging over the economy is coming from the uncertainty created by President Trump’s multi-front trade war. As talks have collapsed between the U. S. and China, and rhetoric on both sides has begun to resemble Cold War dimensions, economists have had to factor in the possibility of higher consumer prices, disrupted supply chains, and falling exports. What’s worse is that the situation with China looks like it will get worse before it gets better. And just this week, things got even dicier when Trump shocked everyone with his surprise tariff announcements against Mexico. Even though the administration had already invested much political capital in negotiating and pushing the United States Mexico Canada Trade Agreement (USMCA – the replacement for NAFTA), the president seemed more than willing to risk blowing up the entire agreement in pursuit of a win on border security. Such whimsical displays on trade policy may undermine the Administration’s negotiations with all of our trading partners.As I have argued in the past, most Americans are completely unaware of the benefits we receive from free trade in the form of lower consumer prices and lower interest rates. When prices rise for everything sold in Walmart and when Americans face higher mortgage and credit card rates, the true cost of an ill-advised trade war will come into sharper focus.With these uncertainties piling up, Powell stepped up to the microphone this week and told us what we already should have known: There is no more tightening bias and that the next move the Fed makes may be to cut rates not to raise them.When the Fed last raised rates, controversially, back in December, I argued that that would be the last time it would do so, and that its next move would be a cut. At the time, those predictions were woefully out of step, bordering on delusional. To believe that the Fed would so quickly retreat after blowing the bugle of advance so loudly, would be to admit that it had no idea what it was doing, and that the best minds on Wall Street could not see a crisis looming in plain sight. Yeah. That’s about right. Since they were all blindsided by the 2008 crisis, why should we expect their vision to be any clearer now?The elephant in the room that no one wants to acknowledge is that the “unconventional” policies that were introduced to fight a “once in a century” crisis are now the conventional policies of choice to combat the normal fluctuations of the business cycle. But zero percent interest rates and quantitative easing only worked a decade ago because people thought they were temporary. If they knew that the policies were permanent, the dollar may have plummeted and the resulting inflation may well have overwhelmed any benefits the stimulation delivered. But the naïve belief that the Fed could reverse course, unwind its bloated balance sheet and normalize interest rates, kept the game going and kept the dollar strong. Now that the illusion may about to be shattered, the dollar may not survive the next round of enhanced QE and ZIRP.When the Fed first went down this road, I said it was a mistake. I likened the Fed’s proposed exit strategy to pulling a table out from under a cloth while leaving the cloth and dishes suspended in mid-air. I said the Fed had checked us into a monetary roach motel, and that eventually there would be more QE programs than Rocky movies. While my analogies often drew laughs from my devotees, (see my standup comedy routine), they were ignored by just about everyone else.QE4 will have to be larger than the three earlier rounds combined, as the annual Federal budget deficits could exceed 3 trillion. However, while China, Russia, and many emerging market nations were eager buyers of Treasuries during those initial rounds, they may likely be sellers of Treasuries during the next round. That means none of the inflation created to finance QE would be exported. So the big price increases next time may take place in the supermarket rather than the stock market. Americans would finally be forced to deal with the adverse effects of inflation that we have been spared for the past 10 years. It’s not going to be pretty.Unfortunately, the economic carnage will be blamed on Trump and capitalism. So just like the 2008 financial crisis gave us Barack Obama, the coming crisis will give us something much worse; a Democratic president hell-bent on transforming America in the way Hugo Chavez transformed Venezuela. Socialism will not fare any better here than it did there.In 2008 the Fed made a deal with the devil, sacrificing America’s soul in exchange for a decade of phony growth. That decade is coming to an end, and the devil is here to collect his due.

Stock Market Will Hit A High And The Fed Will Buoy Up The U.S. Dollar As The Debt Explodes

by: WWS Swiss Financial Consulting SA

Summary

- The S&P stock market index has made good the losses of December 2018 and reached new highs. - The trade war with China might have adverse effects on the markets.- The Fed has stopped raising rates and plans to end QT in September.- The US national debt is currently 22.2 trillion dollars and rising.- The US dollar is the canary in the coal mine.

Investors should beware of becoming complacent.

This article has an ambitious purpose, namely, to show investors how interconnected different financial sectors are and how they influence other sectors. The stock markets, the Fed, the debt and the dollar are not independent entities that go their own way. They influence each other. The US dollar is an indicator of what is happening, and investors should not be complacent even if the dollar is strong. The first area to be considered is the stock market.

The SPY will probably top 3,000 in the very near future, and some pundits are already talking about it going over 4,000. That is quite unlikely as the heightened volatility thanks to the China-US trade war shows. If the negotiations between China and the US fail, the market could suffer a marked downturn. The fact is that the stock markets have recovered from the December swoon. Investors that sold equities at the highs in September and waited to buy again until the markets bottomed in December did very well. At the present time stocks are expensive. But the markets may continue going up due to corporation stock buybacks. Apple plans to buy back 75 billion dollars of its own stock in 2019. The stock went up 6% on news of a good Q1. So buybacks will probably buoy up the stock markets as buybacks for over one trillion dollars are planned for 2019. This is good news for executives that are paid in stock or stock options as well as shareholders who sell their stocks while the prices are still high.

Interest rates influence the stock market and the Fed has stopped raising rates and plans to end QT (Quantitative Tightening) in September. That is at least what one is led to believe even if the recent press conference of Chairman Powell confuses matters and hardly creates clarity.

The EFF is now at 2.44%, which is high if compared with what investors can glean from European sovereign bonds. The Germans and Swiss offer much lower interest rates. So the Fed has made American debt interesting for investors seeking fixed income securities.

Evan as the Fed claims that it will be patient, one wonders what is going to happen as the federal debt increases at a fast pace. See the debt clock.

The budget deficit for 2019 will be close to around one trillion and the 2020 budget deficit is projected to be over one trillion. The national debt may well be 30 trillion by 2030. Since the CBO has not reckoned on a recession or an economic slowdown, the debt could swell to as much as 40 trillion by 2030 if there is a recession. The massive federal debt is going to be a drag on the economy.

Given these factors, the strength of the US dollar should not be taken for granted. Present interest rates help to strengthen the US dollar but also result in higher costs for the Treasury to service the debt. In addition to that the Treasury is going to have to find the capital to fund not only rolling over existing debt but also the budget deficits. It is highly likely that the Fed will end up acquiring large amounts of Treasury paper in order to provide the necessary liquidity if capital markets do not make available the amounts needed. Monetization of the debt is the safety valve if the pressure on the Treasury mounts excessively.

Under these circumstances, the US dollar has been performing reasonably well against the euro, which suffers from various ailments like Brexit, high sovereign debt of most members of the EU and an economy that is not particularly robust.

Investors should keep an eye on current exchange rates that can change fairly quickly. If the Fed raises interest rates to fend off higher inflation, then the US dollar should strengthen still more. If the Fed lowers rates in case of a recession and economic duress, then the dollar would probably suffer in the Forex markets. In the event that the debt increases to the point that monetization of the debt on the part of the Fed becomes necessary, then it is difficult to predict the result. Japan has managed to keep the yen as a sort of safe haven currency despite years of monetization and huge increases in the balance of the BoJ.

So the US dollar exchange rate becomes a sort of canary in the coal mine. The US government keeps going deeper and deeper into debt like a coal mine that goes deeper and deeper. That is going to mean increased costs for servicing the debt and less money available for defense and other government expenses. It remains to be seen how the Forex markets will react to excessive US national debt and a continually worsening financial situation of the government. If one adds to all these factors the serious problem of highly-leveraged corporations that have been making debts to buy back their own shares, then the scene is set for a serious economic crisis as well as a dollar crisis if the default rate should increase by even a small margin.

The complications of the economic situation can make it difficult for investors to keep track of all these different factors. The stock markets have done so well in Q1 that it is unlikely that stock prices are going to go much higher in Q2, and a correction is quite likely. The Fed is being “patient” and developments in the economy could lead the FOMC to raise rates if there is high inflation or to lower them if there is a recession.

The Treasury is going to have to raise large amounts of funds to cover the significant budget deficits that can be foreseen. If the Fed has to resort to QE or partially monetizing the debt, then confidence in the US dollar could be eroded, and this would become apparent in the quotations of the currency in the Forex markets. So investors should keep in mind that upward or downward movements of the dollar can be taken as signs of basic underlying developments in the economy that are influenced by the stock markets and the Fed. The bottom line here is that investors should carefully examine what investments they intend to make in foreign markets, both DM and EM. They should also carefully choose which currencies would fare better against the US dollar in a downturn. Betting on the Argentinean peso is an extremely risky proposition and is not to be recommended.

As mentioned above, the US dollar is still going strong. There are, however, various scenarios that could result in a fall in the value of the dollar. If the China-US trade war is not settled by an agreement, then the dollar could suffer as the global economy absorbs the fall in trade that would probably result. The stock markets would probably also suffer, and a bear market could ensue. That could have an adverse effect on the dollar. A stock market fall could induce the Fed to lower interest rates, and that would not be good for the dollar since international investors would find the US dollar less attractive both for equities and for fixed income investments. The trade dispute might also bring about a recession as the economy is already in the late stage of an expansion. This would result in company profits falling, which would make it more difficult for companies to carry out their plans for share buybacks. That would have a negative effect on share prices as buybacks have been the main support for the stock markets.

On the other hand, if there is inflation, the Fed could raise interest rates to fight inflation. That could attract foreign investors to buy US debt paper. Raising interest rates would also make refinancing corporate more difficult as over five trillion dollars in corporate debt has to be refinanced in the next five years. Higher interest rates could cause a higher default rate and could bring about a corporate debt crisis that would in its turn discourage investors and thus drag down the dollar. US inflation would also have the effect of making American products more expensive in global markets. This would probably have as a result that the trade balance would become more negative.

The increase in the national debt could result in monetization of a part of the debt by the Fed, and this could cause a loss of faith in the dollar with a consequent fall of its value in the Forex markets.

Demand for the dollar could also fall due to a stronger EU economy and a recover of the euro, which makes up a large part of the dollar index. This is presently unlikely as the EU has several difficult problems to solve besides Brexit and high sovereign debt on the part of members, especially Greece and Italy.

Demand for the dollar could also decrease due to the development of an alternative international payment system worked out by China and Russia so as to avoid having to use the SWIFT payment system. Then there is the recently established oil futures market in Shanghai, which favors the renminbi as the currency for oil contracts. Should Saudi Arabia no longer insist on payment for its oil only in US dollars, then the petrodollar would undergo a cataclysmic disaster very quickly instead of a slowly eroding position in the petroleum markets.

In this context one should consider the long-term plans of China to promote the renminbi as an international reserve currency. The decision of the BIS to revalue central bank gold holdings and have them count 100% of their market value instead of 50% is good for gold but not so good for the US dollar. If central banks decide to hold more gold in their reserves and more renminbi, then demand for the US dollar would not be as strong. This process could take some time, perhaps three to five years, but it will influence the value of the dollar.

So what investors should take away from this article is that complacency has no place in the current financial environment. The stock markets may well undergo a correction in the near future while the Fed remains in what could currently be considered a “neutral” position as the federal debt increases. This of course puts pressure on the capital markets. In the meantime the US dollar has remained strong in the Forex markets. Watch the dollar. If it falls like a canary in a coal mine, an explosion could soon follow.

IMAGINE THAT, by some twist of fate, you become the ruler of an oil-rich state. A crash in the oil price has left a hole in its budget. You are forced to consider selling the kingdom’s assets. Among them is a mothballed oilfield in a remote part of the country—so remote that it costs $90 to retrieve each barrel of oil. That is above the prevailing price of $70 a barrel. Even so, you are advised to try to sell a licence to operate the field.Who would buy such a licence? It is valuable only if a barrel of oil sells for at least $90. Yet there is always value in a right—if it carries no obligation. The greater the chance that prices will rise above $90, the more the licence can be sold for. The price will be higher if the licence is for a long period. Crucially, the price also depends on how changeable the oil price is. The more volatile, the likelier it is that it will hit a level where it is profitable to restart production.

Volatility is normally something to fear. People prefer a stable income to an erratic one, for instance, and they feel the same way about their wealth. In this regard, the jumpiness of stock prices is a source of discomfort. But where you have rights without obligations—options, in other words—things are different. Here, volatility is welcome.Look closely, and the hypothetical oil licence has the features of a “call” option, a particular kind of financial contract. A call option is the right to buy an asset—a barrel of oil or a basket of stocks, say—at a specified price (the strike price) on or before a specified maturity date. The owner of a call option profits if the price of the underlying asset goes above the strike price. The owner is not obliged to buy at the strike price; she will do so only if it is in her interests. Anyone who buys the oilfield licence is essentially buying a call option on the oil price. If it goes above $90 the buyer makes a profit; if it stays below $90 for as long the licence is valid, the option expires worthless.

Putting a value on options is a fiddly business. The key ingredients in the Black-Scholes model, the industry formula, are time, volatility and the gap between the asset’s strike price and its current price. A small gap is more likely to be closed than a large one, so options with strike prices close to prevailing prices cost more. Call options with a strike price above the prevailing price are said to be “out of the money” and are cheaper. The more violently prices fluctuate, the more chance there is that an out-of-the-money option, like the hypothetical oil licence, becomes a winning lottery ticket at some point before it matures.Estimates of volatility are a central input to options prices. They can also be calculated from those prices. The VIX (a contraction of volatility index) is one such gauge. It is the level of expected volatility derived from the market in equity-index options. Many of these traded options are put options, which confer on a buyer the right to sell an asset (in this case the S&P 500 index of leading stocks) at a specified price. By contrast with call options, the owner of a put option benefits when the price of the asset falls. Out-of-the-money puts are insurance policies. They pay off when a market crashes.As in any other corner of financial markets, there are traders looking for mispricing. The Black-Scholes pricing model has flaws that they might exploit. A few years before he died, Fischer Black (who with Myron Scholes gave his name to the formula) listed them in a paper called “The holes in Black Scholes”. A big one is the assumption that an asset’s volatility is known and fixed. You can make a decent estimate of it based on history. But how prices will fluctuate in the future is unknowable. And volatility itself is volatile. So are forecasts of it—the VIX is prone to spikes in anxious moments (see chart). Black offered some advice in dealing with such flaws. If you think volatility will rise, you should buy options; if you think it will fall, you should sell them. And as he showed in his paper, the value of an out-of-the-money option rises very rapidly as volatility inches up.This quality has not gone unnoticed. Nassim Nicholas Taleb, a trader-turned-author, has built a view of the world based on the properties of out-of-the-money options. There are fragile things, like Ming vases or priced-for-perfection stocks, which are hurt by an increase in disorder and randomness. And there are others that come to life because of such an increase, among them our oil licence, a put on the S&P index or even personal character. These things are “Antifragile”, the title of one of Mr Taleb’s books. They have a value that is latent. All you need is a dose of volatility to bring it out.

Democratic presidential candidates are making promises they cannot deliver

Even if one of them beats Donald Trump, their most ambitious schemes are bound to be undone by electoral reality

TO BE NOTICED in the crowded Democratic presidential primaries, it helps to toss out a sweeping policy proposal or two. Bernie Sanders, the socialist senator from Vermont, who took this approach in his unsuccessful challenge to Hillary Clinton in 2016, would still like free public college tuition and “Medicare for All”. After a slow start Elizabeth Warren, the senior senator from Massachusetts, is enjoying a little polling bounce as reward for her proposals to break up big tech firms, impose a wealth tax on the ultra-rich and bring in universal child care. Upstarts have latched onto the strategy, too. Pete Buttigieg, the mayor of South Bend, Indiana, would like to pack the Supreme Court with six more justices. Andrew Yang, an entrepreneur with a large online following, has made a universal basic income his defining issue. Actually accomplishing any of these things will prove much harder than advertised, because even if Democrats were to take the White House in 2020, they look unlikely to take control of the Senate.It may seem obvious to point out that the eventual Democratic nominee will first have to defeat Mr Trump before remaking the American health-care system. Yet when debating their two dozen (and counting) choices, party activists sometimes sound as if dethroning Mr Trump, whom betting markets now give a 49% chance of re-election, is inevitable. Americans usually like to re-elect their presidents when the economy is doing well. In April the unemployment rate hit a 49-year low. The chance of some presidential meltdown delivering a crushing Democratic victory seems slight. Though Mr Trump remains unpopular—with approval ratings hovering around 42%—his supporters are unyielding. A slew of scandals, from the jailing of his close associates to the caging of migrant children at the border, have had little measurable effect on his popularity.Even if Mr Trump lost, the Democrats’ less-discussed Senate problem would persist. Although it is theoretically possible for a future Democratic president to assemble cross-party majorities to pass legislation, continued partisan trench-warfare seems more likely. It is difficult to imagine a single Republican voting for a wealth tax. For Matt Bennett of Third Way, a centre-left think-tank, chastened Republicans could revert to being “partisan but not preposterous” after Trumpism breaks its hold over the party. The debate might then fall between “kitchen-table” ideas, like gradual expansions of health-insurance coverage, which might stand a chance, and “Brooklyn coffee-shop, thumb-sucker” ones, like Medicare for All or abolishing the country’s immigration-enforcement agency, which would not.Democrats would therefore need a working Senate majority to get more ambitious schemes through. Out of 100 senators, 47 are reliable Democrats. To win back control of the chamber, the party would need to pick up a minimum of three seats and also win the presidency (since the vice-president’s vote breaks ties). That does not sound too hard, but even a net gain of three seats looks a stretch because of the way the upper chamber over-represents rural America. Though it is early, betting markets rate Democrats’ chances of winning a Senate majority at 31%.To wrest seats away from incumbents in difficult territory, the party needs high-quality candidates to run. Yet top-tier candidates are instead opting to be second- or third-tier presidential candidates. Beto O’Rourke, who nearly upset Ted Cruz in his run for the Texas Senate, would be the prime candidate to challenge John Cornyn, the state’s other Republican senator, but is instead aiming for the White House.At least Mr O’Rourke is registering a few percentage points in the polls. The same cannot be said of Steve Bullock, the popular Democratic governor of Montana, who is opting to run for president rather than challenging Steve Daines, the state’s lone Republican senator. About 69% of Americans do not yet know Mr Bullock well enough to rate his favourability, according to a recent poll from YouGov.Stacey Abrams, who lost a close contest for governor in Georgia, and who has the diary schedule of someone who is running for something, has said she will not stand for the Senate. Even without the distracting draw of the White House, recruiting troubles persist: Josh Stein, the attorney-general of North Carolina, would be the obvious candidate to challenge Thom Tillis, but he has declined. Tom Vilsack, a prominent former governor of Iowa, has ruled out a challenge to Joni Ernst.Even if they were to win a narrow Senate majority, that would not automatically result in the kind of new New Deal that Democratic activists seem to dream of. Surmounting the filibuster, which requires a super-majority of 60 votes for legislation, will be impossible without Republican votes. Ms Warren has endorsed eliminating the filibuster, as has Mr Buttigieg. Her Senate colleagues and competitors, Cory Booker, Kirsten Gillibrand and Kamala Harris, are more skittish, even though it is difficult to imagine some of their signature campaign issues—gun control for Mr Booker, paid family leave and abortion rights for Ms Gillibrand, and marijuana legalisation for Ms Harris—attracting eight or so breakaway Republican supporters.Many current policy debates would be rendered practically meaningless by divided government, or even by a slim Democratic majority in the upper chamber. A hypothetical President Joe Biden and a President Elizabeth Warren would accomplish much the same in legislative terms, which is to say next to nothing. In that scenario, policy differences over foreign affairs and trade, where the president does have a lot of unilateral power, would matter more. But these are hardly being debated.The people chosen by a President Biden or Warren to run the regulatory agencies would push in the same centre-left direction: reversing rollbacks of environmental protections under this administration, creating more expansive definitions of civil rights and pushing anti-trust regulators to be bolder. These are not insignificant powers. But proposals for sweeping social change, the kind that will be offered by candidates in the primary debates, would probably languish in committees.

Trade data for May offered the latest clue that domestic demand is weaker than expected

By Nathaniel Taplin

A cloudy day in Shanghai. Photo: johannes eisele/Agence France-Presse/Getty Images

In targeting China’s export machine, President Trump seems to have hit the country’s imports. Chances that growth will slow further, or the yuan will sink below the totemic level of seven to the dollar—or both—are rising.China’s May trade data, released Monday, gives markets their first glimpse of how shipments are holding up in the wake of the White House’s latest tariff increase on Chinese goods, instituted on May 10. Exports were up 1.1% on the year, better than April’s 2.7% decline, but some of that probably reflected front-loading in early May before higher tariffs kicked in. More worrying, imports fell at their fastest pace since mid-2016: They were down 8.5% on the year following a 4.0% rise in April. That follows other clues that domestic demand is weaker than expected—sharply lower new orders in May, according to China’s manufacturing purchasing managers index, and faltering steel prices.

May’s precipitous drop in import demand probably overstates the weakness a bit—on a year-to-date basis, imports were only down 3.7%. That’s ugly, but not catastrophic. What’s worrying is that both commodity imports, a gauge for the health of China’s construction sector, and imports from major electronics producers such as Korea and Japan, which feed China’s embattled electronics supply chains, were weak. Imports from Japan dropped 15.9% on the year after growing 1.4% in April. Imports from Korea were down 18.2%, a much steeper decline than April’s 2.4% fall. Imports from Taiwan also dropped at a faster pace. All of that suggests lower finished electronics exports from China in the months ahead.

Meanwhile, imports of copper, oil and iron ore all grew more slowly or declined outright. China’s housing sector has been a bright spot for the economy in 2019, thanks to rebounding credit growth early in the year and a more permissive stance from Beijing on local governments’ efforts to support their markets. But credit growth slowed again in April, and so did output growth of major industrial inputs such as cement, glass, power and nonferrous metals.Banks are still struggling with tight funding conditions following the takeover of a small bank by regulators in late May. The case is building for more monetary support from China’s central bank—and, unless the G-20 produces a breakthrough in trade talks with the U.S., a weaker yuan.

We asked our researchers a question recently, “Could Gold rally above $3750 before the end of 2019?”. We wanted to see what type of research they would bring to the table that could support a move like this of nearly 200% from current levels. We wanted to hear what they thought it would take for a move like this to happen and if they could support their conclusions with factual conjecture.Now we ask you to review these findings and ask yourself the same question. What would it take for Gold to rally above $3750 (over 200% from current levels) and why do you believe it is possible?

Our research team came to two primary conclusions in support of a Gold price move above $3750 :

A) The US Presidential election cycle/political environment could prompt a vicious global economic contraction cycle of fear and protectionist consumer and corporate activity that propels the global economy into a deflationary (mini-crisis) event.B) The global trade wars could complicated item A (the US Presidential election cycle) and create an accelerating component to this global political event. The result is the mini-crisis could turn into “a bit more” than a mini-crisis if the global trade wars prompt further economic contraction and disrupt global economic activities further.Our research team suggested the following as key elements to watch out for in terms of “setting up the perfect storm” in the global markets.A) The US Dollar falls below $94 and continues to push a bit lower. This would show signs that the US Dollar is losing strength around the worldB) The Transportation Index falls below $4350 and begins a bigger breakdown in price trend – targeting the $3000 level. This would indicate that global trade and transportation is collapsing back to 2007-08 levels.C) Oil collapses below $45 would be a certain sign that global Oil demand has completely collapsed and the sub-$40 level would very quickly come into perspective as a target.D) Global Financial stability is threatened by Debt/Credit issues while any of the above are taking place. Should any of the A, B or C items begin to take form over the next few weeks or months while some type of extended debt or credit crisis event is unfolding, it would add a tremendous increase of fear into the metals markets.Our researchers believe the US Dollar is safe above the $91 level throughout the end of 2019 and that any downside risk to the US Dollar would come in brief price rotations as deflationary aspects of the global economy are identified. In other words, at this time, we don’t believe the US Dollar will come under any severe downside pricing pressures throughout the end of 2019. We do believe a downside price move in the US Dollar may be setting up between now and early July 2019, but we strongly believe the $91 to $93 level is strong support for the long term.

The Gold Spot price / the US Dollar price chart highlights the incredible upside price move in Gold after 2001-02. It was almost a perfect storm of events that took place after this time to prompt a move like this to the upside. Not only did we have multiple US based economic crisis events, we also had a series of global economic “shifts” taking place where capital and assets were migrating all across the globe searching for superior returns. Could this happen again?? Of course it could. Although, we believe the next move in precious metals will be met with a completely different set of circumstances – very likely targeting foreign nations and not the US economy.

This SPDR GLD chart shows a moderately safer play for investors and traders. The potential for a 20%+ upside price move over the next 60+ days is quite likely and our belief is that traders should be able to trade GLD throughout many of the upside and downside price rotations over the next few weeks and months. Ultimately, if you are skilled enough to pick proper entries, a decent trader could focus on GLD and pick up 65% to 120% ROI over a 7 to 12 month span of time.

Pay attention to where the opportunities are for your level of skill and capital. As we’ve been saying for many months, 2019 and 2020 will be fantastic years for active traders. Stick with what you can execute and trade well because there will be dozens of trades available to most traders over the next 16+ months.

Overall, our research team believes that precious metals have just begun to move higher on a WAVE C impulse move. We authored a research post suggesting that Gold and Silver were currently 20 to 30% undervalued back in late May 2019. The current upside move in Gold and Silver may be just the beginning of a much bigger move.

Ideally, we believe this initial impulse move will end above $1650. From these current levels, that reflects a 25% to 30% upside move in GLD. If any of the fear-inducing items, listed above, begin to take shape over the next 12+ months, we could certainly see Gold above $2100 before too long. $3750 may seem like “shooting for the stars”, but all it takes is a combination of fear and deflation/inflation to drive investors into a gold-hoarding mode just like we saw after 2003-2004 – and that move prompted a 500% price rally from the $300 base level. That same move today would put the current price of Gold near $7800. It might seem like it could never happen – but it could. Bottom line, we forecast the markets and share some extreme analysis like this to open your eyes to some potential opportunities. But, you cannot just jump into gold or miners after reading this and think you are set for success. The markets are never that simple. You must actively adjust and trade with the market and our daily video analysis is what will keep you on the right side of the market more times than not. This week, we locked in some profits on our long gold ETF, and gold miners ETF, why? because our analysis says both of these are at resistance and could pullback before heading higher. We don’t buy, hope and hold, we enter positions, lock-in profits, rinse, and repeat over and over again.

Despite the political turmoil engulfing the United Kingdom, there is growing evidence to suggest that the "northern powerhouse" model of regional development outside of London is working. If the government fulfills its recent commitment to support a new Northern Powerhouse Rail project, current progress could gain even more momentum.

Jim O'Neill

LONDON – After leaving Goldman Sachs in May 2013, I had the privilege of chairing an independent City Growth Commission to study the geographical imbalances of the British economy. Our task was to determine why London and the southeast had become so dominant, and how the economic performance of other major urban centers might be improved.

Our most important conclusion was that key Northern English cities were close enough to be united into a single market similar in size to that of the London metropolitan area. If the economic and commercial agglomeration we envisioned could be realized, the United Kingdom would become home to not one but two globally competitive city-based commercial hubs. Crucially, what came to be called the northern powerhouse model was designed in such a way as to complement London, rather than undercut it through competition. The goal was both to restore geographic balance and raise the UK’s overall growth performance.After then-Chancellor of the Exchequer George Osborne adopted the plan in June 2014, I joined Prime Minister David Cameron’s government to help manage its implementation. But, owing to the Brexit referendum in June 2016, both men left government by the next month, and by September, I had left, too. Still, I have been able to keep tabs on the plan’s progress as the vice chair of the Northern Powerhouse Partnership, a non-governmental organization launched by Osborne in the fall of 2016.

Since then, the conventional narrative about the northern powerhouse is that it has lost momentum. In light of the ongoing Brexit chaos, there can be little doubt that it – along with pretty much everything else – has fallen down the government’s policy agenda. But that does not mean it has been forgotten. Just last month, Osborne’s successor, Phillip Hammond, indicated that he would sign off on £39 billion ($51 billion) in funding for a Northern Powerhouse Rail initiative. By reducing travel and shipping times between the major northern towns and cities, the project promises to boost the region’s productivity and advance the original goal of the northern-powerhouse plan.

Ever since chairing the City Growth Commission, I have believed that it is more important to frame productivity-enhancing policies in terms of geographic location than in terms of specific industries or sectors. No one can know what business sector will be ascendant in the future; few could have predicted just 25 years ago that Amazon and Apple would command the positions they do. But places such as towns, cities, and regions will never disappear, even if they can and do fall into despair.Fortunately, a growing chorus of credible commentators and experts is now also focusing on the importance of physical places in ensuring the sustainability of contemporary capitalism. Chief among them are the University of Oxford’s Paul Collier, one of the world’s leading voices in development economics, and Raghuram G. Rajan, a former governor of the Reserve Bank of India and a professor at the University of Chicago Booth School of Business. It is my profound hope that their advocacy for place- and community-centered economic and social policies will influence policymakers.As for the original northern powerhouse, there is evidence of modest progress. To be sure, Londonhas performed better than northern areas over the past decade, as purchasing managers’ indices (PMI) for London, Yorkshire and Humberside, and the North West show. Moreover, many economic observers assume that London will be more resilient to the effects of Brexit than the country’s manufacturing-heavy regions will be.

But now consider the same PMI data in the narrow context of the past five years, and particularly the past three. The other regions have begun to outperform London, with the North West performing especially well, and with Yorkshire widening an already positive outperformance gap.

Some of this divergence is due to London itself slipping, most likely owing to its weakening property market and the cooling investment environment brought on by Brexit. Nonetheless, the regions associated with the northern powerhouse are showing persistent strength, and the PMI data are further supported by anecdotal evidence and other regional economic statistics, such as housing prices in the last few years.These trends may prove incidental and fleeting. But there is reason to think that they are indicative of a deeper structural change following the modest devolution and development policies adopted by Westminster between 2015 and 2017. If the government is genuinely committed to investing in the Northern Powerhouse Rail initiative, it could add significant momentum to the current progress, mobilizing – literally and figuratively – the animal spirits of northern businesses, civic leaders, and citizens.

Jim O'Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chairman of Chatham House.

If you know the other and know yourself, you need not fear the result of a hundred battles.

Sun Tzu

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.